Call it the non-event of 2011. This was supposed to be the year
, which went public again in late 2010, with analysts painting a
fairly rosy picture for the years ahead. Indeed, at the start of
that analysts at Morgan Stanley thought GM's stock might hit $100
in a few years.
At the time, I suggested investors take such a lofty prediction
with a grain of salt: "A reason to be a bit cautious on Morgan
Stanley's very aggressive
: That target implies an uninterrupted path of global economic
growth for the next four years. And few want to make that bet."
As recently as August,
and GM on a head-to-head basis and concluded that although both
stocks were equally cheap, Ford was the better bet, thanks to a
vastly superior management team.
of GM have slid 18% since then, while shares of Ford have risen 3%.
I still think Ford makes for an excellent long-term investment, but
I now think GM actually represents the better short to mid-term
trade. Here's why...
A changing tide
The key to
investing is to anticipate a shift in sentiment. It's not enough
that a stock is cheap (and GM surely is at around 5.5 times
projected 2011 profits). Instead, you need "cheap -- with
catalysts." And GM has them. You won't necessarily find them
embedded in 2012
earnings per share (
forecasts, because per-share profits are likely to be flat next
year at about $3.90. Instead, in 2012 shares will likely respond to
what investors anticipate in 2013 and beyond. Indeed, GM's 40% drop
this year is in anticipation of a worsening near-term outlook for
2012 and a fairly thin product pipeline of new vehicles.
But that's about to change.
GM had to conserve cash in 2008 and basically starved resources
from the engineering team. The company did an admirable job of
keeping its line-up reasonably fresh in subsequent quarters, but
rivals such as Ford, Hyundai and others have done an even better
job. Yet the company's stronger financial position during the past
year or so has led to acceleration in new product development that
should be pay off later in 2012 and especially in 2013.
For example, the company's bread-and-butter Malibu sedan will hit
showrooms next year with very favorable early reviews thus far. The
fact that this roomy sedan will get nearly 40 miles to the gallon
on the highway tells you that GM's inability to design efficient
vehicles is a thing of the past.
More importantly, GM had been ceding ground to Ford in the
highly-lucrative truck segment, thanks to fresher models from Ford.
Ford's truck sales rose 21% in November from a year ago, while GM's
truck sales rose just 5%. But help is on the way. A new Silverado,
which is the platform for the bulk of GM's truck sales, will be
released in 2013, and the company is expected to boost the truck's
design and fuel efficiency. Also, GM is set to once again
aggressively target the small truck
with a bold
new Colorado truck model
The timing may be fortuitous. Recent employment trends have led
some to think new home construction may finally, finally turn up in
2012. Contractors, armed with stronger income, are expected to
spend heavily to upgrade their aging truck fleets.
Costs and cash
Perhaps the strongest argument for GM can be found on the company's
and income statements. Though it's often-mentioned, it's worth
repeating that GM now has nearly $40 billion in net cash. The whole
company is valued at just $33.6 billion on the stock market. Is
this business really worth -$6 billion? Selling for less than net
cash implies some sort of imminent implosion of this business. I
just don't see it.
In fact, GM stands to make money in the toughest of sales
environments. Recent new labor agreements will take GM's costs even
lower. The company agreed to 2%-3% annual wage increases, according
to UBS, but any new hires will be brought in at far lower labor
rates than existing employees. As GM's veteran higher-cost
employees retire, that average hourly rate is likely to rise even
more slowly than the agreed upon 2%-3% figure.
Material costs are also set to drop in 2012. Steel prices appear to
have peaked last spring at roughly $880 per ton of hot-rolled
steel. We're exiting the year at about $625, which should help
lower costs for all automakers in 2012..
So why are shares so cheap in the face of these tangible positive
factors? Well, the view beyond our shores remains murky. North
America will be the bright
for the auto industry in 2012 as other economies work though their
own problems. Investors simply don't know how bad things will get
in Europe, but it's worth noting that cars eventually wear out, and
GM is retaining
. So 2012 may be a challenge for GM's European operations, but with
a bullet-proof balance sheet, the direst outlooks are overblown.
The longer-term outlook for Europe and Latin America will surely
improve, and shares should start to anticipate better days ahead.
Risks to Consider:
Tight costs, lots of cash and a soon-to-be-freshened product
line-up may not be enough to inspire investors until Europe's storm
has truly passed, so shares may mark time for a while longer.
Action to Take-->
This is all about risk and reward. With a cash-rich balance sheet
in place, it's hard to see how GM can fall any further. If that
were to happen, management must, must, must implement a share
buyback plan. Selling for less than net cash already is an
What kind of upside are we looking at? There's no reason to think
GM can't earn $5 a share by 2013 or 2014. Slap a multiple of eight
on this forecast, and shares could nearly double from current
levels to about $40. It may take two, four or even six quarters for
that to happen, but the stars are coming into alignment for a
-- David Sterman
Disclosure: Neither David Sterman nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.
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